Economic Models Failing

Posted by Tom Lindmark on April 20th, 2009

This is interesting. The WSJ Real Times Economic blog has a post on the problems that economic models are running into in forecasting the recovery.

The article points out that in September most models projected a smooth decline in economic activity rather than the sharp decline that occurred. Likewise, the projections for recovery project the same sort of smooth curve as was seen in September.

The problem is that the models aren’t programmed to deal with jolts. Consequently they aren’t much good at projecting what happens after a jolt. Basically, the economists are flying a little blind right now.

I suppose you can make out of that what you like. An optimist would say that means we may see a sharp recovery and a pessimist probably sees further economic decline as a possible outcome. It’s nice to know that we really don’t know where we are going, isn’t it?